“Scope and severity of macroprudential measures are unjustified”
14 January 2022
The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) is planning macroprudential measures at an unfortunate time and to an extent that is incomprehensible.
The supervisory authority clearly believes that the residential property market harbours risks for banks and as a result is planning to activate the countercyclical capital buffer as well as a sectoral risk buffer. According to BaFin, banks will then have more than EUR 22 billion in Common Equity Tier 1 capital. This will affect only banks, and not other lenders, who presumably will now provide more loans for private housing. That will propel ad absurdum BaFin’s intention of putting the brakes on the residential property market’s development.
“The limitation on banks’ lending capacity that will result from such measures will likewise be counterproductive. Ultimately, not only do banks ensure an adequate supply of credit to the real economy, but must and should, both now and in the future, not only support clients during the COVID-19 pandemic, but also finance the politically popular ecological and digital transformation of the economy,” says vdp’s Chief Executive, Jens Tolckmitt.
According to Tolckmitt, “There are no discernible trends in Germany’s housing market that would justify the severity of the measures being adopted by BaFin.”
Banks’ lending standards are risk-oriented and borrowers are acting accordingly, as demonstrated by current data from vdp’s regular survey on residential property financing (latest survey from 2021): recently, the borrowed funds ratio has decreased to an average of 80%, while the amount of own funds contributed has increased significantly. In addition, the Mortgage Credit Directive (Wohnimmobilienkreditrichtlinie, WIKR) has been in force since 2016. Under the WIKR, banks also check carefully whether a potential loan to the borrowing household is appropriate. The percentage of loan-servicing costs to the acquiring household’s disposable income, the debt service ratio, decreased over the past two years from 26% to 25%, a level that is remarkably low compared to the long-term figure. Furthermore, the changes in banks’ loan portfolios indicate that borrowers have undertaken substantial repayments. Since 2015, the average initial repayments have been around 3%. Current loans are being serviced and private households’ debt sustainability is so far robust – as BaFin has confirmed in its latest Financial Stability Report. Germany is reporting a solid trend in its labour market and private households’ income has remained largely constant, even during the pandemic. In addition, borrowers have accepted loan conditions for long periods of time, agreeing to lock in interest rates for 14 to 15 years.
All in all, the parameters indicate that residential property financing in Germany is extremely stable. Consequently, it is highly unlikely that any problems will spill over into the financial sector – financial stability is guaranteed. The fact that such serious measures are now being planned by regulators is clearly attributable to pressure from international institutions. But the important thing here is the message: the situation in Germany is not necessarily comparable to that of other countries.
Indeed, price increases on the German residential property market can be explained by fundamentals and there are no signs of an abrupt decline in residential property prices. On the contrary: demand still exceeds supply and there are no signs of vacancies in still unpaid-for residential properties such as those seen in the USA or Spain. On the other hand, there is a risk that the planned macroprudential measures will prevent urgently needed investments in new housing construction, as well as upgrades in the energy-efficiency of the existing housing stock, which the new Federal government has set as one of its main priorities. In this case, the necessary expansion of the housing supply, which is expected to lower prices, will not go ahead. Climate protection will also suffer a considerable setback if the renovations required to lower CO2 emissions are not undertaken.